This week, I use AAII’s A+ Investor Stock Grades to provide insight into three healthcare stocks. As a significant portion of the American population approaches retirement age, one must contemplate how to address the requirements of this aging demographic. With that in mind, I take a look at three healthcare facilities and services stocks: HCA Healthcare
Healthcare Stocks Recent News
The forthcoming year marks a historic demographic shift in the U.S., with the highest number of Americans reaching age 65 ever recorded. According to the U.S. Census Bureau’s projections, around 12,000 individuals will celebrate their 65th birthday each day in the coming year, culminating in roughly 4.4 million by the end of 2024. Looking ahead to 2030, every member of the baby boomer generation—individuals born between 1946 and 1964—will have crossed the age of 65. This profound demographic change means that by 2030, one in every five Americans will have reached the traditional retirement age.
As we fast-forward to 2030, projections point to an estimated Medicare population of 69.7 million individuals. This demographic transformation is expected to result in annual acute care costs for Medicare of approximately $259.8 billion, as per the USC Sol Price School of Public Policy’s analysis.
The aging of the population initiates a surge in healthcare expenses, primarily attributed to greater demand for age-related procedures and treatments, particularly in the context of long-term care. It’s noteworthy that the growth rate of long-term care costs is predicted to outpace that of other healthcare needs.
The demographic is poised to exert substantial pressure on healthcare infrastructure. With advancing age, individuals typically necessitate a significantly larger share of healthcare resources. On an annual basis, per capita healthcare expenditures for those age 65 and above tend to average three to five times higher than for younger Americans.
All these factors accumulate into a very favorable outlook for the healthcare industry. While the older population presents challenges in terms of increased demand and rising costs, it also opens up significant opportunities for innovation, specialization and investment.
Grading Healthcare Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is one reason why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three healthcare stocks—HCA Healthcare, Tenet Healthcare and Universal Health Services—based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Healthcare Stocks
What the A+ Stock Grades Reveal
HCA Healthcare is primarily engaged in providing healthcare services. Its general, acute care hospitals typically provide a full range of services to accommodate medical specialties such as internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as well as diagnostic and emergency services. Outpatient and ancillary healthcare services are provided by its general, acute care hospitals, freestanding surgery centers, freestanding emergency care facilities, urgent care facilities, walk-in clinics, diagnostic centers and rehabilitation facilities. Its psychiatric hospitals provide a full range of mental healthcare services through inpatient, partial hospitalization and outpatient settings. The company operates in two geographically organized groups: the National and American Groups. It operates over 182 hospitals, approximately 126 freestanding surgery centers and over 21 freestanding endoscopy centers.
Earnings estimate revisions offer an indication of how analysts are viewing the short-term prospects of a firm. HCA Healthcare has an Earnings Estimate Revisions Grade of C, with a score of 41, which is considered neutral. The grade is based on the statistical significance of its last two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
HCA Healthcare reported an earnings surprise for second-quarter 2023 of 1.6%, and in the prior quarter reported a positive earnings surprise of 25.4%. Over the last three months, the consensus earnings estimate for the second quarter of 2023 has increased from $0.93 to $1.31 per share due to 13 upward revisions and one downward revision. This earnings estimate has also increased from one month ago by 4.4%.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher Quality Grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
HCA Healthcare has a Quality Grade of A, with a score of 97. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross income to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. However, to be assigned a Quality Score, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
HCA Healthcare has a change in total liabilities to assets of 1.2%, which ranks in the 48th percentile of all stocks. It has a gross-income-to-assets ratio of 97.5%, which ranks in the 97th percentile of all stocks. Additionally, the company has an F-Score of 8, versus the healthcare sector median of 2. The F-Score is a number between zero and nine that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company.
HCA Healthcare has a Momentum Grade of B, with a score of 65. This is driven by strong relative price strength in the second-most-recent, fourth-most-recent and third-most-recent quarters, offset by lower relative price strength in the most recent quarter. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weighting of 20%.
HCA Healthcare also has a Value Grade of B, based on its Value Score of 68. The Value Grade is the percentile rank of the average of the percentile ranks of with the price-to-sales (P/S) ratio, the price-earnings (P/E) ratio, the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (Ebitda), shareholder yield, the price-to-book-value (P/B) ratio and the price-to-free-cash-flow (P/FCF).
Tenet Healthcare is a diversified healthcare services company. Through its subsidiaries, partnerships and joint ventures—including USPI Holding Company (USPI)—it operates approximately 61 acute care and specialty hospitals, as well as over 575 other healthcare facilities, including surgical hospitals, ambulatory surgery centers (ASC), imaging centers, off-campus emergency departments (ED) and micro-hospitals. The company operates through three segments: hospital operations, ambulatory care and Conifer. Its hospital operations segment includes its acute care and specialty hospitals, imaging centers, ancillary outpatient facilities, micro-hospitals and physician practices. Its ambulatory care segment consists of USPI’s ASCs and surgical hospitals. Its Conifer segment provides revenue cycle management and value-based care services to hospitals, health systems, physician practices, employers and other clients through its Conifer Holdings (CNFR) subsidiary.
Tenet Healthcare has an A+ Growth Grade of C, with a score of 49. The Growth Grade considers the average annual sales growth over the last five years, the number of year-over-year increases in sales and the number of years with positive cash from operations over the five-year period. The company reported first-quarter 2023 revenues of $5.7 billion, up 21.5% from $4.7 billion in the prior-year quarter. The company reported a quarterly diluted loss per share of $0.27, up from a loss of $0.47 per share in the prior-year quarter. Operating cash flows were $706 million, down from $1.1 billion in the same quarter of 2022.
Tenet Healthcare has a Momentum Grade of B, based on its Momentum Score of 67. This means that it ranks in the second-highest tier of all stocks in terms of its weighted relative price strength over the last four quarters. The score is derived from a high relative price strength of 14.0% in the third-most-recent quarter and 31.5% in the second-most-recent quarter. The score is offset by low relative price strengths of –14.7% and –12.4% in the most recent and fourth-most-recent quarters, respectively. The ranks are 34, 92, 82 and 37, sequentially from the first quarter. The weighted four-quarter relative price strength is 0.8%, which translates to a rank of 67.
The company has a strong Quality Grade of A. It has an F-Score of 8, which is above the sector median of 2, ranking in the 94th percentile of all stocks. It also has a very strong gross-income-to-assets ratio with a rank of 90. Tenet Healthcare has a Growth Score of 49, which is considered average.
Universal Health Services is a holding company. It operates through its subsidiaries, including its management company. It is engaged in owning and operating acute care hospitals, outpatient facilities and behavioral healthcare facilities. Its segments include acute care hospital services, behavioral healthcare services and other. It owns and operates approximately 359 inpatient facilities and 39 outpatient and other facilities located in 39 states, Washington, D.C., the U.K. and Puerto Rico. It provides services that include general and specialty surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, diagnostic care, coronary care, pediatric services, pharmacy services and behavioral health services. It also provides capital resources and a variety of management services to its facilities, including information services, finance and control systems, facilities planning, physician recruitment services and public relations.
The company has a Value Grade of B, based on its Value Score of 66. Universal Health Services’ Value Score is based on several traditional valuation metrics. The company has a percentile rank of 25 for the price-to-sales ratio, 18 for shareholder yield and 47 for the price-to-book ratio. The company has a price-to-book ratio of 1.45, a shareholder yield of 5.5% and a 0.64 price-to-sales ratio. A lower price-to-sales ratio is considered better, and Universal Health Services’ price-to-sales ratio is well below the sector median of 3.13. The price-to-book ratio (the lower the better) is below the sector median of 1.72.
Universal Health Services has a strong Quality Grade of A, with a score of 88. The company has a buyback yield rank of 89. The buyback yield represents the repurchase of outstanding shares divided by a stock’s existing market capitalization. Its buyback yield of 4.9% is above the sector median of –4.4%. Its F-Score of 8 is above the sector median of 2.
Universal Health Services has a Growth Grade of A, based on its Growth Score of 88, which is considered very strong. This is based on sales increases and positive cash from operations in four out of the last five years. The company has a strong Momentum Grade of B, with a score of 74.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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